QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 1, 2017

OR

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 1-10079

CYPRESS SEMICONDUCTOR CORPORATION

(Exact name of registrant as specified in its charter)

Delaware

94-2885898

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

198 Champion Court, San Jose, California 95134

(Address of principal executive offices and zip code)

(408) 943-2600

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐ (Do not check if a smaller reporting company)

Smaller reporting company

☐

Emerging Growth Company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The total number of outstanding shares of the registrant’s common stock as of October 20, 2017 was 333,664,764.

The discussion in this Quarterly Report on Form 10-Q contains statements that are not historical in nature, but are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that involve risks and uncertainties, including, but not limited to, statements related to: our pursuit of long-term growth initiatives, including various long-term strategic corporate transformation initiatives, collectively referred to as our Cypress 3.0 strategy; expected improvements in margin and our ability to successfully execute on our margin improvement plan; our manufacturing strategy including our ability to efficiently manage our manufacturing facilities and achieve our cost goals emanating from our flexible manufacturing strategy; our ability to secure supply to meet customer demand; the anticipated impact of our acquisitions, dispositions and restructuring activities, including our acquisition of the IoT business of Broadcom Corporation in July 2016; anticipated growth opportunities in the automotive, consumer and industrial markets; our expectations regarding dividends and stock repurchases; our expectations regarding future technology transfers and other licensing arrangements; our efforts to license and/or monetize our intellectual property portfolio; our expectations regarding the timing and cost of our restructuring liabilities; our expectations regarding our active litigation matters and our intent to defend ourselves in those matters; the competitive advantage we believe we have with our patents as well as our proprietary programmable technologies and programmable products; our plans for our products, pricing, and marketing efforts, including the potential impact on our customer base if we were to raise our prices; our backlog as an indicator of future performance; our ability to pay down our indebtedness and continue to meet the covenants set forth in our debt agreements; the risk associated with our yield investment agreements; our foreign currency exposure and the impact exchange rates could have on our operating margins; the adequacy of our cash and working capital positions; the value and liquidity of our investments, including auction rate securities, other debt investments, and investments in privately-held companies; our ability to recognize certain unrecognized tax benefits within the next twelve months, as well as the resolution of agreements with various foreign tax authorities; our investment strategy; the impact of interest rate fluctuations on our investments; the volatility of our stock price; the impact of actions by stockholder activists; the size and composition of our Board of Directors; the adequacy of our real estate properties; the utility of our non-GAAP reporting; the adequacy of our audits; the potential impact of our indemnification obligations; and the impact of new accounting standards on our financial statements and our ability to recognize revenue. We use words such as “may,” “will,” “should,” “plan,” “anticipate,” “believe,” “expect,” “future,” “intend,” “estimate,” “predict,” “potential,” “continue,” and similar expressions to identify forward-looking statements. Such forward-looking statements are made as of the date hereof and are based on our current expectations, beliefs and intentions regarding future events or our financial performance and the information available to management as of the date hereof. In addition, readers are cautioned not to place undue reliance on these forward-looking statements. Except as required by law, we assume no responsibility to update any such forward-looking statements. Our actual results could differ materially from those expected, discussed or projected in the forward-looking statements contained in this Quarterly Report on Form 10-Q for any number of reasons, including, but not limited to: the state and future of the general economy and its impact on the markets and consumers we serve and on our investments; our ability to execute on our Cypress 3.0 strategy and our margin improvement plan; our ability to effectively integrate the Broadcom IoT assets; our ability to attract and retain key personnel; our ability to timely deliver our proprietary and programmable technologies and products; the current credit conditions; our ability to retain and expand our customer base, which may be adversely affected if we were to raise our prices; our ability to transform our business with a leading portfolio of programmable products; the number and nature of our competitors; the changing environment and/or cycles of the semiconductor industry; foreign currency exchange rates; our ability to efficiently manage our manufacturing facilities and achieve our cost goals emanating from our flexible manufacturing strategy; our ability to achieve our goals related to our restructuring activities; the uncertainty and expense of pending litigation matters; our ability to pay down our indebtedness and continue to meet the covenants set forth in our debt agreements; our ability to manage our investments and interest rate and exchange rate exposure; changes in the law; the results of our pending tax examinations; our ability to achieve liquidity in our investments; the failure or success of the privately-held companies that we are invested in; and/or the materialization of one or more of the risks set forth in Part II, Item 1A (Risk Factors) in this Quarterly Report on Form 10-Q and in Part I, Item 1A (Risk Factors) in our Annual Report on Form 10-K for the fiscal year ended January 1, 2017.

Cypress Semiconductor Corporation (“Cypress” or the “Company”) reports on a fiscal-year basis. The Company ends its quarters on the Sunday closest to the end of the applicable calendar quarter, except in a 53-week fiscal year, in which case the additional week falls into the fourth quarter of that fiscal year. Fiscal years 2017 and 2016 each contained 52 weeks. The third quarter of fiscal 2017 ended on October 1, 2017 and the third quarter of fiscal 2016 ended on October 2, 2016.

Basis of Presentation

These condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All inter-company transactions and balances have been eliminated in consolidation.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments of a normal, recurring nature, which are necessary to state fairly the financial information included therein. These financial statements should be read in conjunction with the audited consolidated financial statements and related notes thereto included in Cypress's Annual Report on Form 10-K for the fiscal year ended January 1, 2017. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America ("GAAP").

On March 12, 2015, the Company completed the merger ("Merger") with Spansion Inc. ("Spansion") pursuant to the Agreement and Plan of Merger and Reorganization, dated as of December 1, 2014 (the "Merger Agreement"), for a total consideration of approximately $2.8 billion.

On July 5, 2016, the Company completed its acquisition of certain assets primarily related to the Internet of Things business of Broadcom Corporation ("IoT business") pursuant to an Asset Purchase Agreement with Broadcom, dated April 28, 2016, for a total consideration of approximately $550 million. Consequently, the financial condition and results of operations include the financial results of the IoT business beginning July 5, 2016. The comparability of our results for the nine months ended October 1, 2017 to the same period in fiscal 2016 is impacted by this acquisition. Refer to Note 2 of the Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended January 1, 2017.

Effective as of July 29, 2016, the Company changed the method of accounting for its investment in Deca Technologies Inc. ("Deca") from consolidation to the equity method of accounting as a result of the investment by certain third-party investors in Deca. The comparability of our results for the third quarter of fiscal 2017 to the same period in fiscal 2016 is impacted by the said change. Refer to Note 6 and Note 21 of the Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended January 1, 2017.

As a result of the Company's reorganization and internal reporting restructuring that became effective in the fourth quarter of fiscal 2016, the Company operates under two reportable business segments: Microcontroller and Connectivity Division ("MCD") and Memory Products Division ("MPD"). Prior to the fourth quarter of fiscal 2016, the Company reported under four reportable business segments: MPD, Programmable Systems Division ("PSD"), Data Communications Division ("DCD") and Emerging Technologies Division ("ETD"). The prior periods herein reflect this change in segment information.

Certain prior period amounts in the consolidated financial statements have been reclassified to conform to the current period presentation.

The preparation of financial statements in conformity with GAAP requires management to make estimates, judgments, and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses and the related disclosure of contingent assets and liabilities. Actual results could differ from those estimates.

The Condensed Consolidated Statements of Operations for the three and nine months ended October 1, 2017 are not necessarily indicative of the results to be expected for the full fiscal year.

Summary of Significant Accounting Policies

The Company'ssignificant accounting policies are described under Note 1 of the Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended January 1, 2017.

10

Recent Accounting Pronouncements

The following are the recent accounting pronouncements issued but not yet adopted that may materially affect the Company’s consolidated financial statements:

In May 2014, the Financial Accounting Standards Board ("FASB") issued an ASU (Accounting Standard Update) on revenue from contracts with customers, ASU No. 2014-09, “Revenue from Contracts with Customers" ("ASC 606") which outlines a comprehensive revenue recognition model and supersedes most current revenue recognition guidance. The new guidance requires a company to recognize revenue as control of goods or services transfers to a customer at an amount that reflects the expected consideration to be received in exchange for those goods or services. It defines a five-step approach for recognizing revenue, which may require a company to use more judgment and make more estimates than under the current guidance. The new guidance will be effective for the Company starting in the first quarter of fiscal 2018. Two methods of adoption are permitted: (a) full retrospective adoption, meaning this standard is applied to all periods presented, or (b) modified retrospective adoption, meaning the cumulative effect of applying the new guidance is recognized as an adjustment to the opening retained earnings balance.

The Company presently expects to select the modified retrospective transition method. As the new standard will supersede substantially all existing revenue guidance affecting the Company under GAAP, it could impact revenue and cost recognition on sales across all of the Company's business segments, in addition to its business processes, compensation, information technology systems, internal controls and other financial reporting and operational elements.

By the end of fiscal 2016, the Company had transitioned all revenue from distributors from sell-through to the sell-in basis of accounting. Please see discussion related to the transition to sell-in-basis of accounting under Note 1 of the Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended January 1, 2017. Consequently, the Company does not expect the new guidance to materially impact the timing of recognition of future revenue from distributors.

The Company currently expects the adoption of this new guidance may impact the timing of recognition of revenue from its intellectual property portfolio, non-recurring engineering arrangements, and sales of products that do not have an alternative use under a non-cancelable arrangement. Upon adoption of the new guidance, licenses to use portions of the Company’s intellectual property portfolio may need to be recognized as revenues on a straight-line basis over the term of the license agreement. Additionally, the Company expects a change in the timing of revenues recognized from sales-based royalties. The Company currently recognizes sales-based royalties as revenues in the period in which such royalties are reported by licensees, which is typically after the conclusion of the quarter in which the licensees’ sales occur. Under the new guidance, the Company will be required to estimate and recognize sales-based royalties in the period in which the associated sales occur, resulting in acceleration of revenue recognition compared to the current method. The Company also expects that revenue from certain non-recurring engineering arrangements, which are currently recognized upon the achievement of contractual milestones, may need to be recognized as performance obligations are satisfied over time. Similarly, sales of products that do not have an alternative use under a non-cancelable arrangement, which are currently recognized at a point in time may need to be recognized as performance obligations are satisfied over time.

We continue to assess all potential impacts of ASC 606, and preliminary considerations outlined above may change.

In February 2016, the FASB issued ASU 2016-02, Leases, ("Topic 842"), which replaces most current lease guidance when it becomes effective. This standard update intends to increase the transparency and improve comparability by requiring entities to recognize assets and liabilities on the balance sheet for all leases, with certain exceptions. The new standard states that a lessee will recognize a lease liability for the obligation to make lease payments and a right-of-use asset for the right to use the underlying asset for the lease term. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the consolidated statements of operations. The new guidance will be effective for the Company starting in the first quarter of fiscal 2019. Early adoption is permitted. The Company is currently evaluating the timing of adoption and the effect that the new guidance will have on its consolidated financial statements and related disclosures.

In October 2016, the FASB issued ASU 2016-16, "Intra-Entity Transfers of Assets Other Than Inventory". For public entities, ASU 2016-16 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact of adopting this guidance on its consolidated financial statements and related disclosures.

In January 2017, the FASB issued ASU No. 2017-04, "Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment". The standard eliminates the second step in the goodwill impairment test which requires an entity to determine the implied fair value of the reporting unit’s goodwill. Instead, an entity should recognize an impairment loss if the

11

carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, with the impairment loss not to exceed the amount of goodwill allocated to the reporting unit. The standard is effective for annual and interim goodwill impairment tests conducted in fiscal years beginning after December 15, 2019, with early adoption permitted. The Company does not anticipate the adoption of this guidance to have a material impact on its consolidated financial statements and related disclosures.

In May 2017, the FASB issued ASU No. 2017-09, "Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting." ASU 2017-09 amends the requirements in GAAP related to accounting for changes to stock compensation awards. The guidance in ASU 2017-09 is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. The Company is evaluating the impact this guidance will have on its consolidated financial statements and related disclosures.

In August 2017, the FASB issued ASU No. 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities". The amendments in ASU 2017-12 are intended to more closely align hedge accounting with companies’ risk management strategies, simplify the application of hedge accounting, and increase transparency as to the scope and results of hedging programs. The guidance in ASU 2017-12 is effective for annual periods beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. The Company is evaluating the impact this guidance will have on its consolidated financial statements and related disclosures.

NOTE 2. BALANCE SHEET COMPONENTS

Accounts Receivable, Net

As of

October 1, 2017

January 1, 2017

(In thousands)

Accounts receivable, gross

$

361,927

$

338,061

Allowance for doubtful accounts receivable and sales returns

(5,474

)

(5,024

)

Total accounts receivable, net

$

356,453

$

333,037

Inventories

As of

October 1, 2017

January 1, 2017

(In thousands)

Raw materials

$

15,382

$

15,525

Work-in-process

195,488

208,525

Finished goods

76,111

63,726

Total inventories

$

286,981

$

287,776

12

Other Current Assets

As of

October 1, 2017

January 1, 2017

(In thousands)

Prepaid tooling - current

$

19,338

$

21,687

Restricted cash relating to defined benefit pension plan, current

2,429

4,206

Advances to suppliers

25,999

16,549

Prepaid royalty and licenses

16,886

17,769

Derivative assets

2,725

6,605

Value added tax receivable

15,249

11,625

Receivable from sale of TrueTouch Mobile® business

—

10,000

Prepaid expenses

18,773

22,965

Other current assets

17,463

10,756

Total other current assets

$

118,862

$

122,162

Other Long-term Assets

As of

October 1, 2017

January 1, 2017

(In thousands)

Employee deferred compensation plan

$

47,454

$

45,574

Investment in cost method equity securities

17,017

13,331

Deferred tax assets

4,349

4,463

Long-term licenses

10,891

14,498

Advance to suppliers

12,128

25,207

Security deposits

9,099

4,697

Prepaid tooling and other assets

43,030

40,172

Total other long-term assets

$

143,968

$

147,942

Other Current Liabilities

As of

October 1, 2017

January 1, 2017

(In thousands)

Employee deferred compensation plan

$

48,721

$

46,359

Restructuring accrual - current portion (See Note 7)

4,729

24,029

Derivative liability

3,876

15,582

Accrued expenses

44,572

73,983

Other current liabilities

21,135

20,345

Total other current liabilities

$

123,033

$

180,298

13

Other Long-term Liabilities

As of

October 1, 2017

January 1, 2017

(In thousands)

Long-term pension and other employee related liabilities

$

16,651

$

14,672

Restructuring accrual - non-current portion (See Note 7)

9,243

11,294

Asset retirement obligation

5,304

5,067

Other long-term liabilities

4,897

5,716

Total other long-term liabilities

$

36,095

$

36,749

NOTE 3. INTANGIBLE ASSETS

The following table presents details of the Company's intangible assets:

As of October 1, 2017

As of January 1, 2017

Gross

AccumulatedAmortization

Net (a)

Gross

AccumulatedAmortization

Net (a)

(In thousands)

Developed technology and other intangible assets

Acquisition-related intangible assets

$

1,059,008

$

(441,111

)

$

617,897

$

1,021,244

$

(295,023

)

$

726,221

Non-acquisition related intangible assets

12,000

(10,418

)

1,582

12,000

(8,863

)

3,137

Total developed technology and other intangible assets

1,071,008

(451,529

)

619,479

1,033,244

(303,886

)

729,358

In-process research and development

137,439

—

137,439

175,203

—

175,203

Total intangible assets

$

1,208,447

$

(451,529

)

$

756,918

$

1,208,447

$

(303,886

)

$

904,561

(a)

Included in the intangible assets are in-process research and development (“IPR&D”) projects acquired as part of the Merger and the acquisition of the IoT business that had not attained technological feasibility and commercial production. IPR&D assets are accounted for initially as indefinite-lived intangible assets until completion of the associated research and development efforts. Upon completion, the carrying value of every related intangible asset will be amortized over the remaining estimated life of the asset beginning in the period in which the project is completed.

The below table presents details of the in-process research and development assets as of October 1, 2017:

(In thousands)

As of January 1, 2017

$

175,203

Technological feasibility achieved

(37,764

)

As of October 1, 2017

$

137,439

During the three months ended October 1, 2017, there were no projects that had reached technological feasibility and transferred to developed technology. During the nine months ended October 1, 2017, three projects representing $37.8 million of the total capitalized IPR&D, with estimated useful lives of 5 years, had reached technological feasibility and were transferred to developed technology.

In the first quarter of fiscal 2016, the Company recognized a $33.9 million impairment charge related to two IPR&D projects that were canceled due to changes in the Company’s product portfolio strategy. The impairment charges were included in the “Impairment of acquisition-related intangible assets” line in the Condensed Consolidated Statements of Operations.

The Company expects the remaining IPR&D projects as of October 1, 2017 to attain technological feasibility by fiscal 2018.

14

The estimated future amortization expense related to developed technology and other intangible assets as of October 1, 2017 is as follows:

(In thousands)

2017 (remaining three months)

$

48,570

2018

191,793

2019

184,565

2020

124,369

2021

30,912

2022 and future

39,270

Total future amortization expense

$

619,479

NOTE 4. ASSETS HELD FOR SALE

In the third quarter of fiscal 2016, the Company committed to a plan to sell its wafer manufacturing facility located in Bloomington, Minnesota, as well as a building in Austin, Texas.

The carrying value of these assets held for sale at the end of fiscal 2016 reflected the lower of the carrying value or fair value, net of estimated costs to sell the assets. The Company performed an analysis and estimated the fair value of the assets, less estimated selling costs, and determined the value was lower than the carrying value of the assets. As a result, based on this analysis the Company recorded an impairment charge of $37.2 million during fiscal 2016 to write these assets down to their estimated fair value, less selling costs.

The sales of the wafer fabrication facility in Minnesota and the sale of the building in Austin were completed during the first quarter of fiscal 2017. During the third quarter of fiscal 2017, the Company amended the agreement for sale of the facility in Minnesota to sell certain additional assets to the buyer. During the nine months ended October 1, 2017, the Company recorded a gain of $1.3 million resulting from the change in the estimated costs to sell these assets. This gain was recorded in the selling, general and administrative line item of the Condensed Consolidated Statements of Operations.

NOTE 5. INVESTMENT IN EQUITY METHOD INVESTMENTS

Privately-held equity investments are accounted for under the equity method of accounting if the Company has an ownership interest of 20% or greater or if it has the ability to exercise significant influence over the operations of such companies.

The below table presents the changes in carrying value of the equity method investments.

As of October 1, 2017

(In thousands)

Deca Technologies Inc. ("Deca")

Enovix Corporation ("Enovix")

Total

Carrying value as of January 1, 2017

$

134,327

$

54,360

$

188,687

Additional investment

—

5,599

5,599

Equity in net loss of equity method investees

(8,198

)

(6,644

)

(14,842

)

Carrying value as of October 1, 2017

$

126,129

$

53,315

$

179,444

During the first quarter of fiscal 2017, the Company made an investment of $5.6 million in Enovix, which completed the Company's investment commitment in Enovix of $85.1 million per the original agreement dated February 22, 2012. Certain third-party investors made additional investments in Enovix in the first quarter of fiscal 2017, as a result of which the Company's ownership in Enovix decreased from 46.6% as of January 1, 2017 to 41.2% as of April 2, 2017. As of October 1, 2017, the Company’s ownership in Enovix was 41.2%.

The estimated fair value of the Company’s investment in Enovix, based on the enterprise value of Enovix implied from the third-party investment in Enovix, exceeds the carrying value of the said investment as at October 1, 2017. Enovix continues to be in the process of completing certain key product development milestones. Enovix’s estimated enterprise value is sensitive to its ability to achieve these milestones. Delays or failure by Enovix to complete these milestones may have a significant adverse

15

impact on Enovix’s estimated enterprise value and may result in the recognition of a material impairment charge to the Company’s earnings as a result of a write-down of the carrying value of the Company’s investment in Enovix.

As of January 1, 2017 and October 1, 2017, the Company’s ownership in Deca was 52.5%.

The following table presents summarized financial information derived from the consolidated financial statements of Deca and Enovix.

Nine Months Ended

October 1, 2017

October 2, 2016

(in thousands)

Operating data:

Revenue

$

11,623

$

2,903

Gross loss

$

(6,117

)

$

(560

)

Loss from operations

$

(31,561

)

$

(21,731

)

Net loss

$

(32,289

)

$

(21,731

)

Net loss attributable to Cypress

$

(14,842

)

$

(8,879

)

NOTE 6. FAIR VALUE MEASUREMENTS

Assets/Liabilities Measured at Fair Value on a Recurring Basis

The following tables present the fair value hierarchy for the Company's financial assets and liabilities measured at fair value on a recurring basis as of October 1, 2017 and January 1, 2017:

As of October 1, 2017

As of January 1, 2017

Level 1

Level 2

Total

Level 1

Level 2

Total

(In thousands)

Financial Assets

Cash equivalents:

Money market funds

$

431

$

—

$

431

$

287

$

—

$

287

Total cash equivalents

431

—

431

287

—

287

Other current assets:

Certificates of deposit

—

972

972

—

972

972

Total other current assets

—

972

972

—

972

972

Employee deferred compensation plan assets:

Cash equivalents

3,567

—

3,567

3,809

—

3,809

Mutual funds

26,032

—

26,032

22,658

—

22,658

Equity securities

11,738

—

11,738

11,974

—

11,974

Fixed income

3,855

—

3,855

4,088

—

4,088

Stable value funds

—

2,262

2,262

—

3,045

3,045

Total employee deferred compensation plan assets

45,192

2,262

47,454

42,529

3,045

45,574

Foreign exchange forward contracts

—

2,725

2,725

—

6,605

6,605

Total financial assets

$

45,623

$

5,959

$

51,582

$

42,816

$

10,622

$

53,438

Financial Liabilities

Foreign exchange forward contracts

$

—

$

3,876

$

3,876

$

—

$

15,582

$

15,582

Employee deferred compensation plan liability

—

48,722

48,722

—

46,359

46,359

Total financial liabilities

$

—

$

52,598

$

52,598

$

—

$

61,941

$

61,941

16

The Company did not have any assets or liabilities measured at fair value on a recurring basis using Level 3 inputs as of October 1, 2017 and January 1, 2017. There were no transfers between Level 1, Level 2 and Level 3 fair value hierarchies during the three and nine months ended October 1, 2017 and October 2, 2016 related to these securities.

Valuation Techniques:

There have been no changes to the valuation techniques used to measure the fair value of the Company's assets and liabilities. For a description of the valuation techniques, refer to Note 7 of the Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended January 1, 2017.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Certain of the Company’s assets, including intangible assets, goodwill and cost-method investments, are measured at fair value on a nonrecurring basis if impairment is indicated. Refer to Note 3 regarding impairment of certain intangible assets during the first quarter of fiscal 2016.

Fair Value of Long-term Debt

As of October 1, 2017, the carrying value of the Company's revolving credit facility was $248.0 million (See Note 9). The carrying value of the Company's revolving credit facility approximates its fair value since it bears an interest rate that is comparable to rates on similar credit facilities and is determined using Level 2 inputs.

The Company's 2.00% Senior Exchangeable Notes assumed as part of the Merger are traded in the secondary market for debt instruments and are categorized as a Level 2 liability. The carrying value and the estimated fair value of the said Notes as of October 1, 2017 were $138.2 million and $440.7 million, respectively. See Note 9 for further details.

The Company’s 4.50% Senior Convertible Notes are traded in the secondary market for debt instruments and the fair value is determined using Level 2 inputs. The carrying value and the estimated fair value of the debt portion of the said Notes as of October 1, 2017 were $244.1 million and $375.0 million, respectively. See Note 9 for further details.

NOTE 7. RESTRUCTURING

2016 Restructuring Plan

In September 2016, the Company began the implementation of a reduction in workforce ("2016 Plan") which will result in elimination of approximately 430 positions worldwide across various functions. The restructuring charge of $3.4 million recorded for the nine months ended October 1, 2017 consists of personnel costs of $1.8 million and other charges related to the write-off of certain licenses and facilities related expenses of $1.6 million. The personnel costs related to the 2016 Plan during the three and nine months ended October 2, 2016 were $7.7 million.

In March 2015, the Company implemented cost reduction and restructuring activities in connection with the Merger. The restructuring charge of $1.2 million and $0.2 million recorded for the three and nine months ended October 2, 2016, respectively, consists primarily of severance costs and lease termination costs. No restructuring charges were recorded for the three and nine months ended October 1, 2017 related to the Spansion Integration Plan.

Summary of Restructuring Costs

The following table summarizes the restructuring charges recorded in the Consolidated Statements of Operations:

Three Months Ended

Nine Months Ended

October 1, 2017

October 2, 2016

October 1, 2017

October 2, 2016

(In thousands)

Personnel costs

$

—

$

7,935

$

1,877

$

8,550

Lease termination costs

—

35

—

343

Other

—

—

1,593

—

Total restructuring costs

$

—

$

7,970

$

3,470

$

8,894

All restructuring costs are included in the operating expenses under "Restructuring costs" in the Condensed Consolidated Statements of Operations.

17

Roll-forward of the Restructuring Reserves

Restructuring activity under the Company's restructuring plans was as follows:

(In thousands)

Spansion Integration Plan

2016 Plan

Total

Accrued restructuring balance as of January 1, 2017

$

14,219

$

21,104

$

35,323

Provision

—

2,572

2,572

Cash payments and other adjustments

(763

)

(18,545

)

(19,308

)

Accrued restructuring balance as of April 2, 2017

$

13,456

$

5,131

$

18,587

Provision

—

898

898

Cash payments and other adjustments

(741

)

(3,237

)

(3,978

)

Accrued restructuring balance as of July 2, 2017

$

12,715

$

2,792

$

15,507

Provision

—

—

—

Cash payments and other adjustments

(720

)

(815

)

(1,535

)

Accrued restructuring balance as of October 1, 2017

$

11,995

$

1,977

$

13,972

Current portion of the restructuring accrual

$

2,752

$

1,977

$

4,729

Non-current portion of the restructuring accrual

$

9,243

$

—

$

9,243

The Company anticipates that the remaining 2016 Plan restructuring accrual balance of $2.0 million will be paid out in cash through the end of fiscal 2017. The remaining Spansion Integration Plan accrual balance of $12.0 million is expected to be paid over the lease term through 2026 for the excess lease obligation related to the buildings Spansion had leased prior to the Merger, which the Company decided not to occupy in the post-Merger period.

The following table summarizes the unrecognized stock-based compensation expense, by type of awards:

As of

October 1, 2017

Weighted-AverageAmortizationPeriod

(In thousands)

(In years)

Stock options

$

187

0.66

RSUs and PSUs

84,421

1.36

ESPP

10,488

0.51

Total unrecognized stock-based compensation expense

$

95,096

1.27

Equity Incentive Program

As of October 1, 2017, approximately 47.3 million stock options, or 26.5 million RSUs/PSUs were available for grant as share -based awards under the 2013 Stock Plan, the 2010 Equity Incentive Award Plan (formerly the Spansion 2010 Equity Incentive Award Plan) and the 2012 Incentive Award Plan (formerly the Ramtron Plan). As of October 1, 2017, there were 2.2 million shares of stock available for issuance under the ESPP plan.

Stock Options

The following table summarizes the Company's stock option activities:

Shares

Weighted-AverageExercisePrice PerShare

Weighted Average Remaining Contractual term

Aggregate Intrinsic Value

(In thousands, exceptper-share amounts)

(In years)

($ in millions)

Options outstanding as of January 1, 2017

7,947

$

10.70

Exercised

(1,076

)

$

8.38

Forfeited or expired

(263

)

$

13.73

Options outstanding as of April 2, 2017

6,608

$

10.96

Exercised

(270

)

$

8.77

Forfeited or expired

(63

)

$

14.98

Options outstanding as of July 2, 2017

6,275

$

11.01

Exercised

(728

)

$

8.70

Forfeited or expired

(52

)

$

11.49

Options outstanding as of October 1, 2017

5,495

$

11.31

2.69

$

23.10

Options exercisable as of October 1, 2017

5,019

$

11.33

2.60

$

21.20

There were no options granted during the nine months ended October 1, 2017.

On March 16, 2017, the Compensation Committee of the Company approved the issuance of service-based and performance-based restricted stock units under the Company’s Performance Accelerated Restricted Stock Program ("PARS") to certain employees.

The milestones for the 2017 PARS grants include service and performance conditions. Approximately 54% of the grants are based on revenue growth, gross margin, profit before tax (“PBT”), debt leverage and strategic initiatives milestones over the next three years. The remaining approximately 45% of the 2017 PARS grants are based on service milestones that vest over three years.

20

NOTE 9. DEBT

Total debt is comprised of the following:

As of

October 1, 2017

January 1, 2017

(In thousands)

Current portion of long-term debt

Senior Secured Credit Facility:

Term Loan A

—

7,500

Term Loan B

27,303

22,500

Equipment loans and capital lease obligations

—

152

Current portion of long-term debt

27,303

30,152

Revolving credit facility and long-term debt

Senior Secured Credit Facility:

Revolving credit facility

248,000

332,000

Term Loan A

—

84,838

Term Loan B

473,581

406,214

2.00% Senior Exchangeable Notes

138,187

135,401

4.50% Senior Exchangeable Notes

244,107

236,526

Revolving credit facility and long-term debt

1,103,875

1,194,979

Total debt

$

1,131,178

$

1,225,131

As of October 1, 2017, the Company was in compliance with all of the financial covenants under all of its debt facilities.

Senior Secured Credit Facility ("Credit Facility")

The Credit Facility is made up of the revolving credit facility, Term Loan A and Term Loan B.

On February 17, 2017, the Company amended its Credit Facility. The amendment reduced the applicable margins on the Term Loan B and Term Loan A from 5.50% and 5.11%, respectively, to 3.75% effective February 17, 2017. Additionally, the amended financial covenants include the following conditions: 1) maximum total leverage ratio of 4.25 to 1.00 through December 31, 2017 and 2) maximum total leverage ratio of 4.00 to 1.00 through July 1, 2018 and 3.75 to 1.00 thereafter. The Company incurred financing costs of $5.9 million to lenders of the Term Loans which were capitalized and recognized as a reduction of the Term Loan A and Term Loan B balances in “Revolving credit facility and long term debt” on the Condensed Consolidated Balance Sheet. These costs will be amortized over the life of the Term Loans and are recorded in “Interest Expense” on the Condensed Consolidated Statements of Operations.

On April 7, 2017, the Company amended its Credit Facility. The amendment reduced the applicable margins on the Company's Term Loan A from 3.75% to 2.75% effective April 7, 2017. The Company incurred financing costs of $0.4 million to lenders of Term Loan A which were recognized as a reduction of the Term Loan A balance in “Long-term credit facility and long term debt” on the Condensed Consolidated Balance Sheet.

On August 18, 2017, the Company amended its Credit Facility. As a result of the amendment, Term Loan A borrowing of $91.3 million was extinguished as a separate borrowing. Term Loan B was increased by $91.3 million to replace Term Loan A (the "Additional Incremental Term Loan"). Previously unamortized debt issuance costs of $3.0 million related to Term Loan A were written off and recorded as "Interest expense" in the Condensed Consolidated Statements of Operations during the third quarter of fiscal 2017. The additional incremental term loan is subject to the terms of the Credit Agreement and the additional terms set forth in the amendment. The amendment also reduced the applicable margins on Term Loan B from 3.75% to 2.75% effective August 18, 2017. The Company incurred financing costs of $0.6 million to the lenders of the Term Loans which have been capitalized and recognized as a reduction of the Term Loan B balances in “Revolving credit facility and long term debt” on the Condensed Consolidated Balance Sheet. These costs will be amortized over the life of the Term Loans and are recorded in “Interest Expense” on the Condensed Consolidated Statements of Operations.

As of October 1, 2017, $768.3 million aggregate principal amount of loans, including the revolving credit facility, Term Loan B and letters of credit, were outstanding under the Credit Facility.

21

2.00% Senior Exchangeable Notes

Pursuant to the Merger, Cypress assumed Spansion's 2.00% Senior Exchangeable Notes (the “Spansion Notes”) on March 12, 2015. They are fully and unconditionally guaranteed on a senior unsecured basis by the Company. The Spansion Notes will mature on September 1, 2020, unless earlier repurchased or converted, and bear interest of 2.00% per year payable semi-annually in arrears on March 1 and September 1. The Spansion Notes may be due and payable immediately in certain events of default.

As of October 1, 2017, the Spansion Notes are exchangeable for 196.7 shares of common stock per $1,000 principal amount of the Spansion Notes (equivalent to an exchange price of approximately $5.08) subject to adjustments for dividends, anti-dilutive issuances and make-whole adjustments upon a fundamental change. Refer to Note 14 of the Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended January 1, 2017 for further details.

Upon conversion, the Company may pay or deliver, as the case may be, cash, shares of its common stock or a combination of cash and shares of its common stock, at its election. If the Company satisfies its conversion obligation solely in cash or through payment and delivery, as the case may be, of a combination of cash and shares of our common stock, the amount of cash and shares of common stock, if any, due upon conversion will be based on a pre-defined conversion value.

It is the Company’s intent that upon conversion, the Company will pay to the holders of the Spansion Notes cash for an amount up to the aggregate principal amount of the Spansion Notes. If the conversion value exceeds the principal amount, the Company intends to deliver shares of its common stock in respect to the remainder of its conversion obligation in excess of the aggregate principal amount (“conversion spread”). Accordingly, for the purposes of calculation of diluted earnings per share, there would be no adjustment to the numerator in the net income per common share computation for the cash settled portion of the Spansion Notes, as that portion of the debt liability is expected to be settled in cash. The conversion spread, will be included in the denominator for the computation of diluted net income per common share, using the treasury stock method.

The net carrying amount of the liability component of the Spansion Notes consists of the following (in thousands):

October 1, 2017

January 1, 2017

Principal amount

$

149,990

$

149,990

Unamortized debt discount

(11,803

)

(14,589

)

Net carrying value

$

138,187

$

135,401

The following table presents the interest on the Spansion Notes recognized as an expense during the three and nine months ended October 1, 2017 and October 2, 2016:

Three Months Ended

Nine Months Ended

October 1, 2017

October 2, 2016

October 1, 2017

October 2, 2016

(in thousands)

Contractual interest expense at 2% per annum

$

746

$

746

$

2,238

$

2,235

Accretion of debt discount

939

894

2,786

2,656

Total

$

1,685

$

1,640

$

5,024

$

4,891

4.50% Senior Exchangeable Notes

On June 23, 2016, the Company issued, at face value, $287.5 million of Senior Exchangeable Notes due in 2022 (the “Notes”) in a private placement to qualified institutional buyers under Rule 144A of the Securities Act of 1933, as amended. The Notes are governed by an Indenture (“Indenture”), dated June 23, 2016, between the Company and U.S. Bank National Association, as Trustee. The Notes will mature on January 15, 2022, unless earlier repurchased or converted, and bear interest of 4.50% per year payable semi-annually in arrears on January 15 and July 15, commencing on January 15, 2017. The Notes may be due and payable immediately in certain events of default.

The Notes are exchangeable for an initial exchange rate of 74.1372 shares of common stock per $1,000 principal amount of the Notes (equivalent to an initial exchange price of approximately $13.49 per share) subject to adjustments for anti-dilutive

22

issuances and make-whole adjustments upon a fundamental change. Refer to Note 14 of the Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended January 1, 2017 for further details.

Upon conversion, the Company may pay or deliver, as the case may be, cash, shares of its common stock or a combination of cash and shares of its common stock, at its election. If the Company satisfies its conversion obligation solely in cash or through payment and delivery, as the case may be, of a combination of cash and shares of its common stock, the amount of cash and shares of common stock, if any, due upon conversion will be based on a pre-defined calculation of the conversion value.

It is the Company’s intent that upon conversion, the Company would pay the holders of the Notes cash for an amount up to the aggregate principal amount of the Notes. If the conversion value exceeds the principal amount, the Company intends to deliver shares of its common stock in respect to the remainder of its conversion obligation in excess of the aggregate principal amount (“conversion spread”). Accordingly, for the purposes of calculating diluted earnings per share, there would be no adjustment to the numerator in the net income per common share computation for the cash settled portion of the Notes, as that portion of the debt liability is expected to be settled in cash. The conversion spread will be included in the denominator for the computation of diluted net income per common share using the treasury stock method.

The following table includes total interest expense related to the Notes recognized during the three and nine months ended October 1, 2017 and year ended January 1, 2017 (in thousands):

Three Months Ended October 1, 2017

Nine Months Ended October 1, 2017

Year Ended January 1, 2017

Contractual interest expense at 4.5% Per annum

$

3,271

$

9,811

$

6,900

Amortization of debt issuance costs

337

976

700

Accretion of debt discount

2,202

6,605

4,646

Total

$

5,810

$

17,392

$

12,246

The net liability component of the Notes is comprised of the following (in thousands):

October 1, 2017

January 1, 2017

Net carrying amount at issuance date

$

231,180

$

231,180

Amortization of debt issuance costs to date

1,676

700

Accretion of debt discount to date

11,251

4,646

Net carrying amount

$

244,107

$

236,526

Capped Calls

In connection with the issuance of the Notes, the Company entered into capped call transactions with certain bank counterparties to reduce the risk of potential dilution of the Company’s common stock upon the exchange of the Notes. The capped call transactions have an initial strike price of approximately $13.49 and an initial cap price of approximately $15.27, in each case, subject to adjustment. The capped calls are intended to reduce the potential dilution and/or offset any cash payments the Company is required to make upon conversion of the Notes if the market price of the Company’s common stock is above the strike price of the capped calls. If, however, the market price of the Company’s common stock is greater than the cap price of the capped calls, there would be dilution and/or no offset of such potential cash payments, as applicable, to the extent the market price of the Common Stock exceeds the cap price. The capped calls expire in January 2022.

Capital Leases and Equipment Loans

In 2011, the Company entered into capital lease agreements which allow it to borrow up to $35.0 million to finance the acquisition of certain manufacturing equipment. Assets purchased under all capital leases are included in “Property, plant and equipment, net” on the Company's Consolidated Balance Sheet. As of the end of the third quarter of fiscal 2017, there was no balance outstanding against these capital leases.

In December 2011, the Company obtained equipment loans from a financial institution for an aggregate amount of approximately $14.1 million which are collateralized by certain manufacturing equipment and bear interest of 3.15% to 3.18%

23

per annum payable in 60 equal installments. As of the end of the third quarter of fiscal 2017, all of the equipment loans have been paid off.

Future Debt Payments

For each of the next five years and beyond, the scheduled maturities of the Company's debts including interest as of October 1, 2017, are as follows:

Fiscal Year

Revolving credit facility

Term Loan B

2.00% Senior Exchangeable Notes

4.50% Senior Exchangeable Notes

Total

(In thousands)

2017 (remaining three months)

$

2,158

$

25,767

$

—

$

—

$

27,925

2018

8,630

46,998

3,000

13,117

71,745

2019

8,630

49,290

3,000

13,117

74,037

2020

250,158

58,001

152,990

13,153

474,302

2021

—

420,864

—

13,117

433,981

2022 and after

294,113

294,113

Total

$

269,576

$

600,920

$

158,990

$

346,617

$

1,376,103

NOTE 10. COMMITMENTS AND CONTINGENCIES

Operating Lease Commitments

The Company leases certain facilities and equipment under non-cancelable operating lease agreements that expire at various dates through fiscal 2022 and thereafter. Some leases include renewal options, which would permit extensions of the expiration dates at rates approximating fair market rental values at the time of the extension.

As of October 1, 2017, future minimum lease payments under non-cancelable operating leases were as follows:

Fiscal Year

(In thousands)

2017 (remaining three months)

$

4,881

2018

14,550

2019

10,312

2020

8,378

2021

6,425

2022 and thereafter

22,289

Total

$

66,835

Restructuring accrual balances related to operating facility leases were $12.0 million and $14.2 million as of October 1, 2017 and January 1, 2017, respectively.

Product Warranties

The Company generally warrants its products against defects in materials and workmanship for a period of one year and that product warranty is generally limited to a refund of the original purchase price of the product or a replacement part. The Company estimates its warranty costs based upon its historical warranty claim experience. Warranty returns are recorded as an allowance for sales returns. The allowance for sales returns is reviewed quarterly to verify that it reflects the remaining obligations based on the anticipated returns over the balance of the obligation period.

24

The following table presents the Company's warranty reserve activities:

Three Months Ended

Nine Months Ended

October 1, 2017

October 2, 2016

October 1, 2017

October 2, 2016

(In thousands)

Beginning balance

$

4,317

$

5,964

$

3,996

$

4,096

Settlements made

(1,104

)

(2,247

)

(1,733

)

(3,328

)

Provisions

1,233

1,424

2,183

4,373

Ending balance

$

4,446

$

5,141

$

4,446

$

5,141

Contractual Obligations

The Company has entered into agreements with certain vendors that include “take or pay” terms. Take or pay terms obligate the Company to purchase a minimum required amount of materials or services or make specified payments in lieu of such purchase. The Company may not be able to consume minimum commitments under these take or pay terms, requiring payments to vendors, which may have a material adverse impact on the Company’s earnings.

Litigation and Asserted Claims

In a matter associated with Ramtron International Corporation (“Ramtron”), a wholly owned subsidiary of Cypress, bankruptcy proceedings are ongoing in Italy where the trustee for four bankrupt entities of Finmek S.pA. ("Finmek") is seeking refunds of approximately $2.8 million in payments made by Finmek to Ramtron prior to Finmek’s bankruptcy in 2004. In November 2014, one of the courts presiding over these proceedings found that approximately $0.5 million (including interest and fees) should be refunded to Finmek. The Company filed an appeal (Court of Appeal of Venice, Docket no. 2706/2015), and on July 13, 2017, the Court of Appeal reversed the decision, ruling in Ramtron’s favor. The Company has prevailed in all other related proceedings (Court of Appeal of Venice, Docket Nos. 1387/2014 and 2487/2015; Tribunal of Padua Docket No. 5378/2009), and time has expired for the trustee to appeal the 1387/2014 and 2487/2015 matters. Due to the current stage of the proceedings and the appellate process, the Company cannot reasonably estimate the loss or the range of possible losses, if any.

In 2013, a former employee filed a grievance against the Company with the U.S. Department of Labor (“DOL”) seeking back pay and reinstatement or forward pay. That matter was tried before an administrative law judge in July 2014. In December 2014, the administrative law judge issued a ruling in favor of the former employee for amounts totaling approximately $1.3 million. On March 30, 2016, the ruling was affirmed by the DOL Administrative Review Board. The Company believed both rulings were erroneous and filed an appeal in the United States Court of Appeals for the Tenth Circuit on April 29, 2016 (Case No. 16-9523). Oral argument was heard by a three-judge panel in January 2017, and on October 16, 2017, the appellate panel ruled in favor of the Company, vacating all prior adverse decisions. This former employee also filed a complaint for wrongful termination in state court in El Paso County, Colorado on March 4, 2015 (Case No. 2015-cv-30632). The state court litigation is stayed pending resolution of the DOL matter. The Company believes the state court action is meritless and will defend against the allegations. Due to the current stage of the state court proceedings, the Company cannot reasonably estimate the loss or the range of possible losses, if any.

On August 15, 2016, a patent infringement lawsuit was filed by the California Institute of Technology (“Caltech”) against the Company in the U.S. District Court for the Central District of California (Case No. 16-cv-03714). The other co-defendants are Apple Inc., Avago Technologies Limited, Broadcom Corporation, and Broadcom Limited. Caltech alleges that defendants infringe four patents. On July 12, 2017, the Court issued a claim construction order. The matter is in the discovery phase and the Company will defend against the allegations accordingly. Due to the current stage of the proceedings, the Company cannot reasonably estimate the loss or the range of possible losses, if any.

On January 30, 2017, T.J. Rodgers, the former Chief Executive Officer and director of the Company, filed a complaint in the Delaware Court of Chancery captioned Rodgers v. Cypress Semiconductor Corp., C.A. No. 2017-0070-AGB (Del. Ch.), seeking to inspect certain Company books and records pursuant to Section 220 of the Delaware General Corporation Law. The complaint does not seek an award of money damages. The complaint does not seek an award for money damages. On April 17, 2017, the Court ruled that Mr. Rodgers was entitled to certain books and records, which were provided by the Company to Mr. Rodgers.

25

On April 24, 2017, Mr. Rodgers filed a second lawsuit in the Delaware Court of Chancery (C.A. No. 2017-0314-AGB), naming the Company’s directors as defendants and alleging breach of the fiduciary duty of candor. The parties entered into a settlement agreement, with an effective date of June 30, 2017, to resolve and dismiss with prejudice all ongoing litigation and claims relating to the subject matter of the Section 220 and breach of fiduciary duty actions. The settlement includes a standstill through the earlier of May 31, 2019 or the 2019 annual shareholders’ meeting, subject to certain conditions, and reimbursement of $3.5 million in documented fees, costs, and expenses incurred by Mr. Rodgers. This charge was recorded in the Costs and settlement charges related to the shareholder matter line item of the Condensed Consolidated Statements of Operations. The said reimbursement of $3.5 million was paid to Mr. Rodgers on July 24, 2017. On July 26, 2017, the litigations were dismissed with prejudice.

On October 16, 2017, a patent infringement lawsuit was filed against the Company in the U.S. District Court for the District of Delaware, entitled Coding Technologies LLC v. Cypress Semiconductor Corp. (Case No. 1:17-cv-01456), in which a single patent is being asserted. Due to the current stage of the proceedings, the Company cannot reasonably estimate the loss or the range of possible losses, if any.

The Company is currently a party to various other legal proceedings, claims, disputes and litigation arising in the ordinary course of business. Based on its own investigations, the Company believes the ultimate outcome of the current legal proceedings, individually and in the aggregate, will not have a material adverse effect on its financial position, results of operation or cash flows. However, because of the nature and inherent uncertainties of the litigation, should the outcome of these actions be unfavorable, the Company's business, financial condition, results of operations or cash flows could be materially and adversely affected.

Indemnification Obligations

The Company is a party to a variety of agreements pursuant to which it may be obligated to indemnify other parties to such agreements with respect to certain matters. Typically, these obligations arise in the context of contracts that the Company has entered into, under which the Company customarily agrees to hold the other party harmless against losses arising from a breach of representations and covenants or terms and conditions related to such matters as the sale and/or delivery of its products, title to assets sold, certain intellectual property claims, defective products, specified environmental matters and certain income taxes. In these circumstances, payment by the Company is customarily conditioned on the other party making a claim pursuant to the procedures specified in the particular contract, which procedures typically allow the Company to challenge the other party’s claims and vigorously defend itself and the third party against such claims. Further, the Company's obligations under these agreements may be limited in terms of time, amount or the scope of its responsibility and in some instances, the Company may have recourse against third parties for certain payments made under these agreements.

It is not possible to predict the maximum potential amount of future payments under these agreements due to the conditional nature of the Company's obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments the Company has made under these agreements have not had a material effect on the Company’s business, financial condition or results of operations. Management believes that if the Company were to incur a loss in any of these matters, such loss would not have a material effect on its business, financial condition, cash flows or results of operations, although there can be no assurance of this. As of October 1, 2017, the Company had no reason to believe a loss exceeding amounts already recognized had been incurred.

NOTE 11. FOREIGN CURRENCY DERIVATIVES

The Company enters into multiple foreign exchange forward contracts to hedge certain operational exposures resulting from fluctuations in Japanese yen and Euro exchange rates. The Company does not enter into derivative securities for speculative purposes. The Company’s hedging policy is designed to mitigate the impact of foreign currency exchange rate fluctuations on its operating results. Some foreign currency forward contracts were considered to be economic hedges that were not designated as hedging instruments while others were designated as cash flow hedges. Whether designated or undesignated as cash flow hedges or not, these forward contracts protect the Company against the variability of forecasted foreign currency cash flows resulting from revenues, expenses and net asset or liability positions designated in currencies other than the U.S. dollar. The maximum original duration of any contract allowable under the Company’s hedging policy is 13 months.

Cash Flow Hedges

The Company enters into cash flow hedges to protect non-functional currency inventory purchases and certain other operational expenses, in addition to its on-going program of cash flow hedges to protect its non-functional currency revenues against variability in cash flows due to foreign currency fluctuations. The Company’s foreign currency forward contracts that

26

were designated as cash flow hedges have maturities between three and nine months. All hedging relationships are formally documented, and the hedges are designed to offset changes to future cash flows on hedged transactions at the inception of the hedge. The Company recognizes derivative instruments from hedging activities as either assets or liabilities on the balance sheet and measures them at fair value on a monthly basis. The Company records changes in the intrinsic value of its cash flow hedges in accumulated other comprehensive income on the Condensed Consolidated Balance Sheets, until the forecasted transaction occurs. Interest charges or “forward points” on the forward contracts are excluded from the assessment of hedge effectiveness and are recorded in interest and other income, net in the Condensed Consolidated Statements of Operations. When the forecasted transaction occurs, the Company reclassifies the related gain or loss on the cash flow hedge to revenue or costs, depending on the risk hedged. In the event the underlying forecasted transaction does not occur, or it becomes probable that it will not occur, the Company will reclassify the gain or loss on the related cash flow hedge from accumulated other comprehensive income to interest and other income, net in its Condensed Consolidated Statements of Operations at that time.

The Company evaluates hedge effectiveness at the inception of the hedge prospectively as well as retrospectively and records any ineffective portion of the hedge in interest and other income, net in its Condensed Consolidated Statements of Operations.

At October 1, 2017, the Company had outstanding forward contracts to buy approximately ¥1,724 million for $15.6 million.

Non-designated hedges

Total notional amounts of net outstanding contracts were as summarized below:

Buy / Sell

October 1, 2017

January 1, 2017

(In millions)

US dollar / EUR

$5.2/€4.3

$25.0 / €23.6

Japanese Yen / US dollar

¥2,959 / $27.3

¥10,129/$87.9

The effect of derivative instruments on the Condensed Consolidated Statements of Operations for the three and nine months ended October 1, 2017 was immaterial.

The gross fair values of derivative instruments on the Condensed Consolidated Balance Sheets as of October 1, 2017 and January 1, 2017 were as follows:

October 1, 2017

January 1, 2017

Balance Sheet location

Derivatives designated as hedging instruments

Derivatives not designated as hedging instruments

Derivatives designated as hedging instruments

Derivatives not designated as hedging instruments

(In thousands)

Other Current Assets

Derivative Asset

$

1,349

$

1,376

$

6,468

$

137

Other Current Liabilities

Derivative Liability

$

1,558

$

2,318

$

14,391

$

1,191

27

NOTE 12. NET INCOME (LOSS) PER SHARE

The following table sets forth the computation of basic and diluted net income (loss) per share:

Three Months Ended

Nine Months Ended

October 1, 2017

October 2, 2016

October 1, 2017

October 2, 2016

(In thousands, except per-share amounts)

Net loss attributable to Cypress

$

11,033

$

9,411

$

(57,652

)

$

(613,884

)

Weighted-average common shares

332,873

321,276

329,787

318,118

Weighted-average diluted shares

360,311

343,718

329,787

318,118

Net income (loss) per share—basic

$

0.03

$

0.03

$

(0.17

)

$

(1.93

)

Net income (loss) per share—diluted

$

0.03

$

0.03

$

(0.17

)

$

(1.93

)

For the three months ended October 1, 2017 and October 2, 2016, approximately 0.8 million and 4.8 million, weighted average potentially dilutive securities consisting of outstanding share based awards and convertible debt, respectively, were excluded in the computation of diluted net loss per share because their effect would have been anti-dilutive. For the nine months ended October 1, 2017 and October 2, 2016, approximately 0.8 million and 8.9 million, weighted average potentially dilutive securities consisting of outstanding share based awards and convertible debt, respectively, were excluded in the computation of diluted net loss per share because their effect would have been anti-dilutive.

NOTE 13. INCOME TAXES

The Company's income tax expense was $4.5 million and $3.3 million for the three months ended October 1, 2017 and October 2, 2016, respectively. The Company's income tax expense was $13.9 million and $1.8 million for the nine months ended October 1, 2017 and October 2, 2016, respectively. The income tax expense for the three and nine months ended October 1, 2017 was primarily due to non-U.S. income taxes on income earned in foreign jurisdictions. The income tax expense for the three and nine months ended October 2, 2016 was primarily attributable to a release of previously accrued taxes related to the lapsing of statutes of limitation, primarily offset by income taxes associated with the Company's non-US operations.

Unrecognized Tax Benefits

As of October 1, 2017 and January 1, 2017, the amount of unrecognized tax benefits that, if recognized, would affect the Company's effective tax rate totaled $26.0 million and $24.3 million, respectively.

Management believes events that could occur in the next 12 months which could cause a change in unrecognized tax benefits include, but are not limited to the following:

•completion of examinations by the U.S. or foreign taxing authorities; and

•expiration of statute of limitations on the Company's tax returns.

The calculation of unrecognized tax benefits involves dealing with uncertainties in the application of complex global tax regulations. Management regularly assesses the Company’s tax positions in light of legislative, bilateral tax treaty, regulatory and judicial developments in the countries in which the Company does business. The Company believes it is reasonably possible that it may recognize up to approximately $0.2 million of its existing unrecognized tax benefits within the next twelve months as a result of the lapse of statutes of limitation and the resolution of agreements with domestic and various foreign tax authorities.

Classification of Interest and Penalties

The Company classifies interest and penalties as components of the income tax provision in the Condensed Consolidated Statements of Operations. As of October 1, 2017 and January 1, 2017, the amounts of accrued interest and penalties totaled $9.9 million and $8.5 million, respectively.

28

NOTE 14. SEGMENT, GEOGRAPHICAL AND CUSTOMER INFORMATION

Segment Information

The Company designs, develops, manufactures and markets a broad range of solutions for embedded systems, from automotive, industrial and networking platforms to interactive consumer devices.

Operating segments are identified as components of an enterprise for which separate discrete financial information is available for evaluation by the chief operating decision-maker, or decision-making group, in making decisions on how to allocate resources and assess performance. The Company’s chief operating decision maker ("CODM") is considered to be the Chief Executive Officer.

The prior periods herein reflect the change in segments as described in Note 1 of the Notes to Condensed Consolidated Financial Statements.

Revenues

Three Months Ended

Nine Months Ended

October 1, 2017

October 2, 2016

October 1, 2017

October 2, 2016

(In thousands)

Microcontroller and Connectivity Division

$

373,584

$

284,241

$

1,052,018

$

699,516

Memory Products Division

230,990

239,604

678,206

693,420

Total revenues

$

604,574

$

523,845

$

1,730,224

$

1,392,936

Income (loss) before Income Taxes

Three Months Ended

Nine Months Ended

October 1, 2017

October 2, 2016

October 1, 2017

October 2, 2016

(In thousands)

Microcontroller and Connectivity Division

$

23,378

$

(7,765

)

$

35,601

$

(17,696

)

Memory Products Division

78,514

64,364

192,896

143,724

Unallocated items:

Stock-based compensation expense

(22,995

)

(27,313

)

(79,266

)

(69,700

)

Restructuring charges, including CEO severance

—

(7,970

)

(3,470

)

(13,394

)

Amortization of intangible assets

(48,428

)

(54,849

)

(146,030

)

(122,641

)

Reimbursement payment in connection with the cooperation and settlement agreement